The U.S. District Court for the Eastern District of Pennsylvania has ruled that a payday loan arbitration agreement containing a class action waiver was not unconscionable under Pennsylvania law because it contained a provision unconditionally giving the borrower the right to opt out of arbitration within 30 days of receiving her loan.

In Clerk v. ACE Cash Express, Inc., No. 09-05117, 2010 U.S. Dist. LEXIS 7978 (E.D. Pa. Jan. 29, 2010), in an opinion authored by Hon. Michael M. Baylson, the court explained that under Pennsylvania law, a party alleging unconscionability must establish both procedural and substantive unconscionability. Ballard Spahr client ACE serviced the plaintiff's loan. Because the plaintiff had the unfettered right to reject arbitration, she could not show that the arbitration agreement had been presented on a take-it-or-leave-it basis. Thus, she was unable to establish procedural unconscionability, so the court enforced the arbitration agreement as written and, further, declined to address her contention that the class action waiver made the arbitration agreement substantively unconscionable. 

ACE moved to compel individual arbitration after the plaintiff brought a class action against it alleging usury and violation of state consumer protection laws. The plaintiff asserted that the arbitration agreement was unconscionable because it contained a class action waiver. 

Most states, like Pennsylvania, require a showing of both procedural and substantive unconscionability. This opinion thus imparts a valuable lesson to consumer financial services lawyers nationwide―the best way to enforce a consumer arbitration agreement containing a class action waiver is to give the consumer the unconditional right to reject it at the time the contract is entered into. If the consumer does not opt out of the arbitration agreement, it likely will be enforced even if it contains other provisions, such as a class action waiver, that are alleged to be substantively unconscionable. (See also our alert Ballard Spahr Prevails in Third Circuit Appeal Challenging Class Action Waiver in Consumer Arbitration Agreement, which reported on a recent Third Circuit opinion holding that the class action waiver was not substantively unconscionable under Pennsylvania law.)

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).  For more information, please contact Alan S. Kaplinsky, group Chair, 215.864.8544 or kaplinsky@ballardspahr.com; or Mark J. Levin, 215.864.8235 or levinm@ballardspahr.com. 


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